How to Settle a Trust in Indiana

By Tom Streissguth

Keeping assets well away from probate court is the main idea of trusts. These legal structures allow a settlor to place investments and property under the management of a trustee. A trust also names beneficiaries who receive assets -- without the assistance of the court system -- when the settlor dies. This event begins settlement of the trust, which is the responsibility of the trustee.

Indiana Trusts and Trustees

Indiana law does not require specific language in a trust document. But the state's probate law does require the trust terms in writing and the document signed by the settlor or the settlor's authorized agent. The trust must clearly state what is trust property, who will serve as trustee, the identity of any beneficiaries and the purpose of the trust. In addition, an Indiana trustee must keep control over trust property, keep an account of all trust assets, give beneficiaries information about the trust on request and keep trust property separate from his own.

Settlement Functions

When a settlor allows himself to change or revoke a trust, he's created a revocable trust; an "irrevocable" trust is one that the settlor may not change or revoke. If the settlor has named himself as trustee of a revocable trust, he must also name a successor trustee. This individual handles the trust when the settlor dies -- at that time, a revocable trust becomes irrevocable. Settlement means managing this transition, if required, by selling assets and distributing bequests to beneficiaries named in the trust. Indiana law includes specific rules on how a trustee may handle trust property and settlement.

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Taxes and Smaller Trusts

For settlement, a trustee must locate the settlor's will. If there are any conflicts between the will bequests and the trust instructions, the will prevails. At any time, the trustee may petition probate court for a determination of how the trust assets should be distributed and to whom. The trustee must also file any required tax returns and pay tax liabilities of the trust. If the trust assets have a value of less than $75,000, a trustee may terminate the trust, even if the trust does not provide for immediate settlement. The trustee carries this out by providing notice of termination to the beneficiaries. In addition, a court may modify or terminate a trust or direct the trustee on how to distribute trust assets. The law specifically provides, however, that any distribution of assets must be "consistent with the purposes of the trust."

Medicaid Reimbursement

A trustee who is settling a trust must also follow state rules that apply to self-settled "special needs" trusts. Such trusts are set up specifically to pay for medical care for the settlor. An Indiana law passed in 2009 makes any special needs trust being terminated responsible for the grantor's unpaid Medicaid expenses. If the expenses exceed the assets of the trust, then beneficiaries will be prevented from receiving any assets.

Trustee Liability

Indiana law also holds the trustee accountable to beneficiaries. If on settlement the trustee breaches the terms of the trust, then he's responsible for any loss in value of trust assets as well as a "reasonable" profit that the assets would have earned. The trustee may also be liable for repayment of any profit he's made by breaching the trust and the attorney's fees of the beneficiary who brings a claim against the trustee.

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Trustee Not Paying Beneficiary

References

Related articles

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